San Diego Business Journal Companies Being Lured Here by Higher Drug Prices, Venture Capital

Hamstrung by lower drug prices and too few European investors willing to fund homegrown biotechs, European biotechnology firms are looking to gain a foothold in the United States where higher returns on medicinal products and venture capital money reign. European CEOs are looking at the U.S. market to sell their products and raise capital, said Michael Ward, managing director of Quartz Capital Partners Ltd., a London-based venture capital firm. "There are lots of companies that are worth financing, but the quality of European companies is not as high as in the United States," said Ward. Ward was one of 1,300 attendees many of whom came from abroad , at last week's ninth annual CALBIOsummit meeting at the San Diego Convention Center. Among the Europeans was Simon Moroney, CEO of the Munich-based biotech firm MorphoSys AG. The native New Zealander hailed Germany as a premier site for biotechnology development, but admitted he too is eyeing opportunities across the Atlantic. "There are so many opportunities here," said Moroney about the United States. "Americans tend to adopt new technologies faster and to find partners for early adoption better here." The United States is also the only free market for drugs in the world, said Michael Krupp, vice president of business development at Japanese Chugai Pharmaceuticals Inc. The Asian pharma has long been banking on an American, Hank L. Nordhoff, located in San Diego, to sell its products here. Drugs are a lot cheaper for consumers in countries like Germany, England, France and Australia, where there are strict price controls. European biotechs look to the U.S because they can sell their drugs at a much higher price here, Krupp said. "The smart companies have a strategy where they look at a pricing trend in high-priced countries first, and then go to the lower-priced countries," he said. Still, it remains to be seen how long Americans are willing to put up with the high cost of drugs. Medicare, the national health system for the elderly, doesn't cover drugs. Presidential candidates Al Gore and George W. Bush both have plans to reform the Medicare system and help the poor. But critics like Linda Sherry, editorial director of Consumer Action, a nonprofit advocacy organization in San Francisco, contend as long as drug makers maneuver to avoid allowing manufacturers to launch generic versions of their products, prescription costs will remain high. "It points to what's wrong with the pharma industry , prices should be the same globally for all drugs," Sherry said. "Pharma doesn't see their role as a social benefit, but as a profit-making experience."

Stifled Innovation

Krupp justified the higher prices by pointing out that drug innovation costs hundreds of millions of dollars and poses a very high risk for investors and companies alike. If the returns aren't sky-high, the incentive to invest in innovative drugs isn't nearly as great, he said. Other countries have proven that price controls stifle innovation. "In every country where there have been price controls, it wipes out the pharmaceutical industry," he said, pointing to a dwindling pharmaceutical presence in Spain, Germany and Italy. That, he said, stands in stark contrast to the burgeoning biotechnology industry in countries like Germany, England and Israel. In Germany, more than 400 biotechs have popped up alone since 1996. That's when the German government finally recognized the importance of biotechnology, said Moroney. The government agreed to subsidize biotech start-ups and began offering venture capital firms matching funds for each dollar spent on biotech development, he said. European-based biotech initial public offerings more than quadrupled within one year, from less than 500 in 1999 to 2,000 this year, according to Ward. European biotech investment climbed to $5 billion this year vs. $1 billion in 1999.

Too Many Firms, Too Little Money Too Many Firms, Too Little Money

But the surge in European biotechs isn't all rosy: There are now too many firms with unsustainable evaluations and too few European investors willing to pour their money into the inferior homegrown firms, Ward said. The absence of a pan-European regulatory drug approval system and reimbursement scheme is also troubling, he said. Ward predicts while the adoption of a common approval system is likely to come first, it's also likely that a single reimbursement scheme will be at the "lowest common denominator." Many European countries wouldn't be able to afford the higher prices. The question is how long can Americans afford them? Americans may complain about escalating drug prices but usually want premier medications, Krupp said. Many of which aren't launched anywhere else in the world. Germany's pricing system tends to favor cheaper, longstanding drugs, because Germans aren't willing to pay higher prices for newer drugs out of their own pockets, he said. So does this mean that Americans are better off health-wise than the rest of the world?

Not necessarily, according to a recent 191-country survey by the World Health Organization. The survey ranked France's health care system the most effective in the world, Italy second and the United States 37th, two spots behind Cuba, the newspaper reported. Though those ratings are disputed, even in the winning countries, one fact remains: Both the French and Italians spend less on health care and live longer, according to a published report